French private sector shrinks again

Job seekers look at job notifications as they visit a National Agency for Employment (Pole Emploi) temporary stand in a shopping centre in Nice October 23, 2012.

Reuters/Eric Gaillard

PARIS (Reuters) - French business activity shrank for the eighth straight month in October, albeit less sharply than in September, as depressed domestic demand and weak exports threaten to drag the economy into recession.

The Markit/CDAF flash composite purchasing manager's index, a preliminary estimate of firms' activity that covers manufacturing and services, inched up to 44.8 in October from 43.2 in September - its lowest level since March 2009.

It was the eighth consecutive month the index has remained below the 50 point threshold separating a contraction in activity from an expansion.

Markit Senior Economist Jack Kennedy said the figures suggested France's 2 trillion euro economy could shrink in the second half of 2012 after posting nine months of zero growth.

"With GDP already looking likely to have contracted in the third quarter, the latest poor figures suggest that the downward momentum has been carried over into the fourth quarter and the economy could well end the year in recession," Kennedy said.

The slowdown in activity was most pronounced in manufacturing, which posted its fastest fall in export sales since March 2009.

The PMI flash estimate for manufacturing was 43.5, up from a final reading of 42.7 in September but missing the average forecast of 44.0 in a Reuters survey of 19 economists.

"Exports within the euro zone are very weak at the moment, both to companies and consumers," said Markit Chief Economist Chris Williamson. "But the big change we are seeing is the extent to which Asia is slowing and how that is exacerbating the weakness in the euro zone market."

The PMI survey followed figures from the INSEE national statistics institute on Tuesday showing business morale for the manufacturing industry slumped to its lowest level in over two years in October.

For the services sector, the PMI flash estimate rose to 46.2 versus a final reading in September of 45.0. It topped the average forecast in a Reuters poll of 18 economists which predicted it rising to 45.7.

Socialist President Francois Hollande won office in May with a pledge to reverse a steady decline in France's manufacturing sector and tackle unemployment running at a 13-year high. His efforts have been hampered by layoffs from companies including retailer Carrefour (CARR.PA) and carmaker Peugeot (PEUP.PA).

The PMI survey showed the pace of layoffs remained high in October, holding steady at September's 34-month record. Both manufacturers and service providers cut payrolls as work backlogs declined substantially.

Business orders for services and manufacturing improved slightly but remained close to September's 41-month low. Markit cited reports that some clients, particularly in the autos sector, were postponing orders and reining in investment due to lack of confidence in the outlook.

High international energy and commodity costs pushed input prices higher, but at a weaker pace than in September. Weak demand meant that output prices continued to fall, with the decline focused on the service sector.

"Inflation is not a concern. When you look at the way companies are having to cut prices out there, it is very much a deflationary environment," Williamson said.

Service providers' business expectations worsened slightly in October, remaining below 50 for a second consecutive month. The indices for outstanding business and new business in the services sector improved slightly but remained below 50.